Peso at Record Low – The Good and Bad

The Mexican Peso has devalued 23.5% in the last 12 months, breaking 16.00/USD for the first time in history today. This is the fastest collapse in the currency since Lehman. But like all markets this is good for some and bad for others.

The peso plunged today to a record low of 17.28 to the dollar to crown a week of dismal news, including another reduction in the growth forecast for this year, lower industrial output, sliding oil prices and worries about U.S. interest rates, China and Greece.

The Finance Secretariat yesterday reduced its forecast for growth this year to 2% to 2.8%, down from May’s figures of 2.2% to 3.2%. The Bank of Mexico lowered its forecast last week to 1.7% to 2.5%.

The Mexican economy expanded by 0.5% in the second quarter, which was just above expectations. But industrial output was flat, another cause for concern, as exports to the U.S. were uneven and oil production continued to drop.

Those two factors are weighing on the economy, said Undersecretary of Finance Fernando Aportela. And Deutsche Bank economist Alexis Milo said industrial output “remains the main concern for growth.”

If there was any good news it was in the 0.9% expansion in the second quarter of the service sector, the strongest in a year.

The Mexican peso’s decline gathered speed, falling by the most in eight weeks to a new record and prompting the central bank to sell $200 million under a currency-intervention program.

The peso slid 1.1 percent to 16.4708 per U.S. dollar as of 1:13 p.m. in Mexico City, sinking the most since June 5. Mexico’s currency has lost 10 percent this year.

The world’s eighth-most-traded currency was swept up in an emerging-market selloff Thursday as U.S. economic data supported the case for higher interest rates from the Federal Reserve. The plunge has continued even as the central bank tried to slow its descent with $52 million of daily dollar sales in addition to the extraordinary auctions, which happen when the peso is unusually volatile.

“I don’t know if this is going to stem the tide,” Kathryn Rooney, a macroeconomic strategist at Bulltick Capital Markets, said in an interview in Mexico City. “The selloff has been really steep.”

The central bank sells $200 million whenever the peso sinks more than 1.5 percent during a trading session from an official fixing rate set the prior day. The program was rolled out in December as the currency swooned along with oil prices, and has been used three times.

In Thursday’s auction, the dollars were auctioned at a rate of 16.4622 pesos each.

In the market for forwards, a type of contract that allows users to lock in future currency prices, traders are pricing in even lower exchange rates in the months to come: 16.65 per dollar at the end of this year and 17.16 at the end of 2016.

Analyst Forecasts

Analysts are predicting the peso will recover. The median of 28 estimates compiled by Bloomberg is for Mexico’s currency to strengthen to 15.7 per dollar by the end of September.

At the start of 2015, the peso was forecast to strengthen 9.3 percent this year versus the dollar, the most in the world. Instead, the currency has slid as traders used it as a hedge for everything from Brazilian corporate bonds to oil prices.

On the Chicago Mercantile Exchange, futures trades designed to profit from the currency’s decline have climbed to a record.

Global factors have added to pressure on the peso at a time when investors already are disillusioned with Mexico’s prospects for an oil-fueled surge in foreign investment.

Morgan Stanley said in a research note Monday that the likelihood is growing that Mexico’s central bank will increase or add to its intervention programs to slow the peso’s decline.

The Bank of Mexico is scheduled to announce its decision on benchmark rates at 1 p.m. Mexico time Thursday. No change is expected, based on a Bloomberg survey of economists.

The Bad News

For those who are holding pesos, and purchase goods in USD, the problem is that they have far less to spend. Many families from Mexico shop for bargains at malls across Texas. Shoppers from Mexico spend at least $5 billion in Texas – just in border cities and millions more across the state. And Mexican shoppers top the list of foreign visitors to Texas who qualify for the sales tax refund.

“We’re shopping less,” said Crystal Herrera, a resident from Ciudad Juarez who was browsing at outlet shops in El Paso. Even as she tries to cut back, her young son, Ivan, added “clothes, tennis shoes, shirts” to his shopping list.

“But now with the way the dollar is, it’s more expensive,” said Jaime Rios, a Chihuahua resident. Rios took advantage of the sales tax refund offered by Texas to foreign visitors. “I use the refund for gas,” said Rios. He planned to drive to another mall to look for bargains before heading back to Mexico. But first, he stopped by the “Tax Free Shopping” counter at the Outlet Shoppes of El Paso. The business facilitates refunds for shoppers in El Paso as well as a dozen locations across Texas including malls in Dallas, Houston, San Antonio San Marcos and McAllen.

Texas Retailers Brace for Slump

Texas retailers are bracing for a possible slump in sales as Mexican shoppers cope with currency fluctuations after the peso plunged to a historic low against the dollar this week. The exchange rate hovered near 16-to-1 before Mexico’s central bank moved to bolster the currency on Wednesday. The plan to sell $52 million dollars a day through June helped the peso rally and recover some of its lost value. The exchange rate Thursday was 15.42.

Texas malls see a spike in sales during major holidays, including Easter, when many families from Mexico take a vacation during Holy Week, “Semana Santa.”

“We actually get a lot of people around that time, Semana Santa,” said Christian Tarango, an employee with Tax Free Shopping.

Peso fluctuations and lost buying power means families may have less to spend this Easter.

Cynthia Villarreal, a working mother in El Paso is worried. She has year old quadruplets and says while fortunately she and her husband both work and get paid in dollars, it means going across the border into Juarez to shop where the money goes further, where the cartels attempting to gain control over the drugs demanded by the US are creating a aura of violence.

The Good News

Those holding dollars are ahead if they are spending their dollars in Mexico today, in that for each dollar they are able to purchase $16.99 pesos worth of goods. For those with enough money to buy a home in Mexico, for say $1.6 million pesos, the cost in dollars would be $94,185.26 USD. A year ago, the same house would have cost $120,000 USD. For those with a bit more money to invest in a retirement home in Mexico, say $350,000 USD, they could purchase a home worth $1.5-million more in today’s pesos or $88,500 USD more in value. There should be an increase in retirees from the troubled USA considering the move to Mexico, especially in the south where there is little or no violence from the border drug wars.

More Jobs for Mexicans

As the peso moves, there will be more jobs for Mexican workers in the many US-based plants operating in the country.

For larger investors, who are opening plants in Mexico, the picture is even better. A US manufacturing concern can invest in building a $10-million USD plant in Mexico right now at a cost approximately $45-million pesos less today than a year ago. That is a savings of approximately $2.6-million USD.

U.S. foreign direct investment (FDI) in Mexico (stock) is already in excess of $100-billion in 2014 and is set to grow substantially providing benefits to Mexican workers.

Overall, Mexico’s export revenue was valued at $397.5 billion in 2014, with 85 percent of this number related to the manufacturing of mobile phones, televisions, cars, computers and airplane parts. As a result, more companies are investing large sums of money to establish a manufacturing operation inside of the country and that sum will certainly grow during this period.

Manufacturing in Mexico has a variety of benefits, but the shift in the peso will prove to be good for those who are already in operation as they will be able to substantially grow, which will produce more jobs in Mexico.

In fact, there are so many that other companies are strongly considering expanding to the developing nation to take advantage of what can only be described as a friendly environment for foreign organizations to operate in.

According to a Bloomberg News report, Mexico currently stands as the sixth-largest auto parts manufacturer in the world. The growth of this particular industry aligns perfectly with the expansion of Mexico’s auto manufacturing industry. Citing data from INA, a trade group, Mexico’s auto parts production sector generated $81.5 billion in revenue in 2014.

“The growth in production and in exports has been spectacular,” Eduardo Solis, president of the Mexican Automobile Industry Association, told Bloomberg News. “The growth reflects the confidence the industry has in our country.”

This year, as many as 2.9 million vehicles are expected to be exported out of the country into foreign markets, with 70 percent of these automobiles being sent to the U.S.

“More companies are investing large sums of money to establish a manufacturing operation inside of the country.”

“The growth pickup in the U.S. is going to be felt first and foremost in countries like Mexico,” Gerardo Rodriguez, portfolio manager of investment management firm Black Rock Inc., told Bloomberg. “Going into 2015, clearly Mexico is one of the markets that’s looking attractive.”

Manufacturing in Mexico has never been more ideal for foreign companies. The country boasts an expanding skilled labor force owning the technical proficiency to assemble a wide range of products. In addition, because the salary demands of people living and working in Mexico aren’t very high, companies can essentially see greater profit margins by due to lowered overhead costs related to labor.

As Mexico’s government continues to put forth initiatives and pass legislation that makes the country attractive to foreign manufacturers, the Mexican economy will continue to flourish, as will customer satisfaction related to the quality of finished products being shipped to consumers around the world. Ultimately, this activity will open up more partnerships for Mexico and outside corporations.

“There’s very little debate, very little questioning of Mexico’s manufacturing competitiveness,” said Nikolak Lippmann, strategist at Morgan Stanley specializing in Mexico equity. “That is very much something investors take for a given at this stage.”

Plastics maker opens new factory in Mexico

Orbis Corp. is a company that manufactures a variety of plastic goods. Some of these items include reusable plastic containers, dunnage and pallets. Based in Oconomowoc, Wisconsin, Orbis operates a number of facilities around the globe.

According to a Plastics News report, the company opened a 265,000 square foot manufacturing facility employing 140 people, in Silao, Mexico earlier this year. Orbis operates several product service centers in Mexico. However, this is the company’s first Mexican manufacturing operation.

“I am very pleased to make this investment in the future of Orbis Corporation in Mexico,” Bill Ash, the company’s president told Plastics in Packaging. “The new facility features best-in-class design for efficient product flow, productivity and environmental sustainability.”

In addition to its new factory, Orbis also formed a partnership with Instituto Estatal de Capacitación, a training school located in Silao. Individuals working at Orbis will be trained in the areas of technical knowledge and general manufacturing in a program that is interactive and hands-on.

Mexico has made technical education a key point of emphasis in attempt to provide foreign companies with workers who are proficiently trained and ready to contribute right away to any manufacturing endeavors. The country’s government is fully committed to pulling marketshare away from popular offshoring destinations such as China and India, and so far, their efforts appear to be successful. In the coming years, expect many more corporations to shift portions of their operations into the country.